Treasury-only money funds are “effectively exempt from the new rules,” write RBC’s Michael Cloherty, Dan Grubert and Yiran Wang.Read here for more details on the plan, which, after the council’s recommendation, still has to be enacted by regulators.

There will be “a host of new costs” for prime money funds, the RBC strategists predict in a client note. But there will be “no change in the cost of running a Treasury-only fund”:

This means that fund complexes will have a large incentive to push investors from Prime money market funds into their Treasury-only money funds. This incentive will fade somewhat once rates rise enough to improve the economics of the money fund industry, but over the next few years we think these changes would trigger a substantial flow from the $1.7T Prime money funds to the $400bn of Treasury-only money funds.

It could easily take more than a year for the Securities and Exchange Commission to get from the FSOC’s vote this week to enacting its own rule. RBC predicts it may not be a done deal until late 2013. But as the plan starts to look likelier, fund companies will probably spring into action.

Money funds will be cautious about triggering an inflow into Treasury-only funds prior to January 2013, as there is widespread concern about extremely low Treasury rates after the expiration of the unlimited FDIC insurance on non-interest bearing transactions deposits and the fiscal cliff potentially reducing bill supply. However, as long as rates are not excessively low in early 2013, we would expect to see flows from Prime to Treasury-only funds start to pick up in Q2, with the transition becoming large enough to impact market pricing by mid-year.

Depending on what happens to the already artificially inflated market for Treasury bonds between now and late next year, it has the potential to be very ugly for investors.

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